Using Green Bonds to Turn Garbage into Jet Fuel

Picture yourself in the not-too-distant future, buckled into your airplane seat, when the pilot announces, “Our flight today will be powered by alternative fuel.”

You might be thinking solar, wind or hydroelectric, but if Fulcrum BioEnergy has its way, the plane will be powered by household waste—yes, garbage—converted into jet fuel through a novel set of thermochemical processes.

Fulcrum, based in Pleasanton, Calif., has set its sights on producing low-cost, low-carbon transportation fuels, including jet fuel and diesel, using municipal solid waste as the raw material. To make its ambition a reality, the company turned to Morgan Stanley’s bond underwriting practice, which raised more than $200 million for the company in tax-exempt municipal bonds through the State of Nevada Department of Business and Industry.  The Bonds were labeled as “Green Bonds” given the environmental benefits of the project and its technology.  Morgan Stanley is among the leading underwriters in completing tax-exempt Green Bond transactions.

Fulcrum could have sought the money through the more traditional approach, such as a project-finance loan from a commercial bank—and it was very close to taking that route. But Jay Sweeney and Richard Weiss, members of Morgan Stanley’s Public Finance team, pointed out the option of a longer-term alternative: municipal bonds.

“We showed Fulcrum how utilizing the tax-exempt capital markets represented a lower-cost financing deal for them than a standard bank loan,” says Sweeney, a Managing Director in the Fixed Income Division, who spearheaded the deal.

Weiss, an Executive Director in same group, explains that, “By turning to high-yield municipal bonds, which are tax-exempt, we were able to save money for the borrower and produce a happy outcome for our client.”

Sweeney and Weiss said they landed the deal in part through internal networking: Ray Spitzley, a Managing Director in the Investment Banking Division who knew Fulcrum’s senior management through his own work, made the introduction. This synergy is emblematic of the power of relationship banking and the advantage of working with a firm that offers the scale and diversification of Morgan Stanley. 

The financing arrangement, with Morgan Stanley as the lead underwriter, is helping Fulcrum build the first of a series of waste-to-fuels plants. That facility, the Sierra BioFuels Plant near Reno, Nevada, is expected to process about 175,000 tons of municipal solid waste annually, creating 11 million gallons per year of “syncrude” oil that will be processed into transportation fuel, according to Fulcrum.

While the municipal solid waste feedstock processing plant has been operational for two years, processing municipal solid waste from suppliers under contract with Fulcrum, the biorefinery plant is under construction. The company expects to start turning out usable low-carbon, low-sulfur syncrude in the second quarter of 2020, with subsequent production of jet fuel.

 In the meantime, Fulcrum is ramping up similar plants in the Chicago and Houston areas, with plans to build out from there. “We think we have all the right pieces in place to roll out a very successful growth program of eight projects across North America,” says Eric N. Pryor, Fulcrum’s Vice President and Chief Financial Officer. He says the company was so pleased with the outcome of the munibond deals underwritten by Morgan Stanley that it expected to continue using that form of financing.

Importantly, from an environmental perspective, the raw material for Fulcrum’s production process will be diverted from landfills, which contribute substantial emissions of methane and carbon dioxide. “We are a less-than-zero carbon emissions product,” says Pryor. “The process of producing the fuel reduces carbon emissions by more than what actually comes out of the tailpipe of a jet.”

Fulcrum’s technology has already won endorsements from a set of powerful partners. It has contracts in place with waste suppliers as well as with companies that want to buy the transport fuel once it’s ready for the marketplace.

Fulcrum has landed a number of strategic partners that include industry leaders and large airlines who have invested in Fulcrum BioEnergy, including United Airlines, Cathay Pacific, Waste Management, Japan Airlines and BP which recently launched a global advertising campaign featuring Fulcrum. These strategic partners have entered into long-term commercial arrangements with Fulcrum, including feedstock supply, product offtake and fuel logistics.

Fulcrum BioEnergy came close to borrowing the money it needed from a commercial bank. But, as the Morgan Stanley team pointed out, that option wouldn’t have taken advantage of the fact that the company qualified for tax-exempt municipal bond financing, because its business is running waste-to-energy plants.

“Jay Sweeney had been in touch with us for a while about bond opportunities,” Pryor says. “And when the time was right, we decided to proceed with that method of financing for the Sierra project. Overall, it was a lower cost-of-capital alternative.”

Pryor emphasized that Sweeney, Weiss and other members of their team had “done a good job of keeping in touch with us and explaining to us what was going on with the bond market and what the opportunity looked like.”

While a bank loan would have been backed by the company’s existing assets, the bond option didn’t require such collateral. “There was no requirement for Fulcrum to put its corporate resources at stake to back the debt,” says Sweeney. Adds Weiss, “The only collateral required was the revenues generated by Fulcrum’s Sierra project and the contracts associated with the project.”

Morgan Stanley underwrote $175 million of project debt in three issues of high-yield municipal bonds through the State of Nevada. The firm also handled a subsequent round of $44 million in mezzanine debt, a hybrid form of debt that bridges bondholders and equity owners.

“Ultimately, Fulcrum is expected to produce a high-quality renewable fuel that will be better for the environment and lower cost to the airlines,” Sweeney says. “One day, you may see on your airline receipt that your flight was powered by petroleum alternatives.”